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The Effects of Sox on Audit Firms

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The Effects of Sox on Audit Firms
Independence of outside audit firms has been an ongoing issue for a long time in the US corporate world. The fundamental problem arises for the lack of clarity about whom does the audit firm really works for, the shareholders or the client company. According to Anandarajan et all (2008), this lack of clarity has resulted in auditor’s independence being impaired. In the US, the client hires, pays, and fires the auditor and therefore, the culture of the auditors serving at the pleasure of the client still remains. As DeAngelo (1981) explained in his article, an important aspect of the loss of auditor independence is that auditors refrain from reporting detected material misstatements in audited financial statements, thereby failing to perform their duty to warn. Another aspect of the issue relates to the provision of non-audit services by auditors to their clients. As Lai (2003) said, this allegation receives much impetus in recent years because non-audit revenue has out-grown audit revenue to become a much more dominant source of public accounting firms’ total revenue. After the recent financial scandals involving large firms like Enron and Worldcom, concern regarding auditor independence has climbed to a height. This triggered the adoption of the Sarbanes-Oxley (SOX) Act which passed into law on July 30, 2002.
The effect of the Sarbanes-Oxley Act has been far reaching from corporate governance to auditor independence rule in the US and abroad. In January 2003, the SEC adopted numerous rules to implement the requirements of the Sarbanes-Oxley Act that changed some fundamental aspects of the outside audit firms. Such as:
Nonaudit services
Under the act, all US publicly traded companies are required to disclose the amount and the nature of fees paid to their outside independent auditors in their annual proxy statement or the 10K filing. These disclosures allow the investors or anyone else to evaluate the fee structure proportion for audit and non-audit services


References: Anandarajan, A., Kleinman, G., and Palmon, D. (2008). Auditor independence revisited: The effects of SOX on auditor independence. International Journal of Disclosure and Governance, 5(2), 112-125. DeAngelo, L. (1981). Auditor size and audit quality. Journal of Accounting and Economics (December), 183-199. Lai, K. (2003). The Sarbanes-Oxley Act and Auditor Independence: Preliminary Evidence from Audit Opinion and Discretionary Accruals. Retrieved from http://ssrn.com/abstract=438280
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